Foreign Currency Translation

4606 words 19 pages
I. Introduction 2
II. Definition 3 A. Difference between translation and conversion 3 B. Role of FASB No. 52 4 1. Determine the functional currency: 4 2. Determine whether the functional currency of the subsidiary is also its home currency. 4 a) If the functional currency is the home currency, 4 b) If the functional currency of the subsidiary is not its home currency, 5
III. Reasons for Translation 5 A. Recording direct business transactions 5 B. Reporting operations conducted through a foreign enterprise 6 C. Measuring the enterprise exposure to the effects of currency fluctuation 7 D. Communicating with foreign audiences-of-interest 7
IV. Financial statement effects of alternative translation rates 7
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The translation adjustment is an inherent result of this process, in which balance sheet and income statement items are translated at different rates.
In this paper, I will be discussing the subject of Foreign Currency Translation, its nature, and the reasons behind its necessity, the different methods that can be followed to accomplish a translation, as well as the risks that can occur during a translation. This paper will also discuss the different types of exchange rates, and the effects of these rates’ fluctuations on Foreign Currency Translation process. As a final point, I will be talking about the Foreign Currency Transactions.
Definition
Difference between translation and conversion
Translation is necessary whenever a company with operations in more than one country prepares consolidated (or group) financial statements that combine financial accounts denominated in one national currency with accounts denominated in another (i.e. parent country’s) currency.
Thus:
“The process of restating various foreign currency balances to single currency equivalents is called translation”.
Companies cannot add Mexican pesos, Japanese yen, Swiss francs, European Euro, and American dollars and obtain meaningful results.

However, one must not confuse between Translation and Conversion.

Conversion is the physical exchange of one currency to

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